The world of health-care pricing

EDITOR'S NOTE: The American Medical Association raised concerns about the fairness and accuracy of this report on the Relative Value Update Committee and its role in determining what Medicare pays for medical procedures. (Read the response) The AMA expressed concern that neither it nor the committee's leadership was contacted for comment. The reporter interviewed a veteran member of the committee, among other experts, but should have contacted the AMA. Marketplace has offered the AMA the opportunity to comment on-air, on its Letters segment. The committee's chairman, Dr. Barbara Levy, said the panel of physicians "does not set prices for medical services." The report notes that the committee's role is advisory but states it "sets" values for procedures. The committee's role is advisory: it assesses factors that go into a procedure (for example, time spent and devices or drugs used) and recommends a relative value for the procedure to the Center for Medicare and Medicaid Services. If the CMS accepts a recommendation, it then applies a formula incorporating other information to set dollar prices for the procedure. The committee, which is known as the RUC, states on its website: "CMS has recognized the expertise of the RUC by adopting 95%" of its recommendations. The article's online headline overstated the confidentiality of the committee and its work. The headline has been revised.

Kai Ryssdal: We're down to counting mere days 'til the Supreme Court shares its thoughts on the healthcare reform law. The ruling will talk about constitutionality and the individual mandate and the Commerce Clause. And maybe about the rising cost of health care in this country.

So to that end... who do you suppose sets the price of individual medical procedures? If you said insurance companies or the government, you're only half right. Because the prices your insurance company pays are based on a set of values listed in a phone-book sized directory of billing codes. Those codes are pretty much the economic hierarchy of modern medicine. They say what's costs more: a colonoscopy or a CT scan or chemotherapy? And those values are set by a closed-door committee of the American Medical Association.

At the Marketplace Health Desk at WHYY, Gregory Warner has been trying to figure out how that committee works.

Gregory Warner: It's called the Relative Value Update Committee, but everyone knows it as the RUC. It's a committee of the AMA. It meets every four monthsin a hotel conference room. And right here -- this being a radio story -- is where I'd play you the sound of one of those meetings. You might hear heated debates between some three dozen doctors over which procedures should be worth and which ones Medicare should pay higher prices for. But I can't play you that sound because RUC meetings are invitation only. Observers are sworn to secrecy. Even the names of the doctors on this private committee were -- until recently -- kept confidential. For those who have been before the RUC, it's a powerful experience.

Richard Waguespack: I've never sat before Congress or any congressional committee, but it is like sitting before a committee that that is the final determiner.

Dr. Richard Waguespack is with the American Academy of Otolaryngology. That's Ear, Nose and Throat docs. It's been his job to come before the RUC to defend his specialty's procedures.

Waguespack: And to make sure that they are properly valued.

The value of a procedure, the fee paid to the doctor, is figured out by adding up hundreds of tiny variables -- from how many average minutes of time the doctor might spend to how many rolls of gauze he might use. These variables are measured and voted on by the RUC. For example, Dr. Waguespack recently presented a new procedure to the RUC called balloon sinus surgery. In this treatment a tiny plastic balloon is used to widen your sinus cavity. In this case the physician doesn't spend many minutes of time, but the supplies are expensive -- $2,600 for a little plastic balloons, and you have to buy a new balloon for each patient. So that was factored into the price. While the exact dollar amount varies a lot by geography and other factors, the average fee is around $3,000 per sinus. Here's Dr Waguespack:

Waguespack: It was felt that these balloons would be used one per sinus.

But doctors use the same balloon for up to six sinuses. Billing Medicare $18,000 for extra balloons that they didn't need or buy.

Waguespack: Some people were expressing concern this appeared to be an undue windfall.

It would kind of be like your mechanic changed your four tires and charged you for four sets of wrenches. Except that would be fraud. In this case, the way the RUC set the value, doctors have no choice but to overcharge.

Charles Koopmann: The system didn't work, OK? And it didn't work with everyone having good intentions.

Dr. Charles Koopmann has served on the RUC for 20 years, or as long as there's been a RUC. So, he's got a lot of experience with valuing codes. He is also the lone Ear Nose and Throat doctor on the RUC -- which means that if anyone in the room that day might have realized that doctors could use the same balloon multiple times, it would have been him.

Koopmann: Did it enter my mind? It really didn't. All we wanted to do is make sure that the costs got covered for a sinus that you were operating on. And, um, that we were successful in. And it turns out we were awfully successful!

I talked to a number of ENT surgeons. All of them said that that most doctors in their field would know that you can reuse a balloon in multiple sinuses. Tom Salzer is an otolaryngologist in Texas.

Tom Salzer: Yeah, I think they would understand that for two reasons. One is it's commonsense.

And the second reason is the device company, owned by Johnson & Johnson, will hold your hand every step of the way.

Salzer: They'll come to your office -- you have to do a certain number of them in the operating room -- and they are there for your first several to help you through them.

Yet apparently no one came to help Charles Koopmann or the other doctors on the RUC that priced this procedure. A central criticism of the RUC is its exclusivity. It has no health economists, no patient groups on its board. RUC members primarily hear from and are chosen by physician specialty societies.

Brian Klepper: Doctors end up coming in and lobbying for their own interests. Having a seat on the RUC is a pathway to do that.

Brian Klepper is a health care analyst in Florida. When he says lobbying you don't have to imagine Washington types with bags of money. He says its sort of built into the process. When the RUC wants to measure those hundreds of variables that go into valuing a code, the first thing that happens is that specialists on the RUC survey other specialists in the profession.

Klepper: When the RUC is evaluating a procedure, they make it known to the society, the society sends out notices that: 'It would be really good if all of our members responded to this because you know the way you respond to this is going to be directly reflected in how we get paid!'

Officially the RUC plays only an advisory role. But a study in Health Affairs last month found that Medicare accepts that advice 90 percent of the time. Remember, we're talking about $80 billion of taxpayer money. But the RUC is even more powerful than that -- because Medicare's reimbursement rates are used as the basis for almost every private insurance company in the country.

Charlie Baker: This is the platform that decides how we pay providers.

Charlie Baker is the former CEO of the Harvard Pilgrim health plan, a not-for-profit insurer in Massachusetts. He says if you want to know what's wrong in health care, Google the RUC.

Baker: By having a process that for all intensive purposes isn't a public process, and doesn't appear to actually be accountable to much of anybody, I think that's kind of un-American!

Medicare officials tell me that they are pushing back against the influence of specialists. They started something called the Misvalued Codes Initiative. And they say that new codes often come into the world with mistakes in them, and Medicare can address them. This year Medicare reduced the fee paid for balloon sinus surgery by 43 percent, so a little less of a windfall. Don Berwick is a former director of CMS, that's the federal agency that runs Medicare.

Don Berwick: Remember that there are thousands of codes that are in play in any year.

And hundreds of thousands of variables that go into pricing them.

Berwick: It would take a long time -- years -- for CMS, even if it had the resources, to go back over every single code and make an independent judgement from what the RUC has made.

The irony is this, he says: as long as we've agreed to pay doctors by adding up the hundreds of specialized things that a doctor does in the course of a procedure, the only people with the expertise to sort through all these variables will be other doctors. So for better or worse, he says, Medicare is stuck with the RUC. Because for now, there's no one else. In Philadelphia I'm Gregory Warner for Marketplace.

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Gregory Warner is a senior reporter for Marketplace, covering the business and economics of health care for the entire Marketplace portfolio. He’s taken on questions as varied as how drugs get named, how ineffective procedures become popular, and how politicians fuel a costly...